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Inefficient continuation decisions, job creation costs, and the cost of business cycles

Den Haan, Wouter J. and Sedlacek, Petr (2014) Inefficient continuation decisions, job creation costs, and the cost of business cycles. Quantitative Economics, 5 (2). 297 - 349. ISSN 1759-7323

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Identification Number: 10.3982/QE253


This paper develops a model according to which the costs of business cycles are nontrivial because they reduce the average level of output. The reason is an interaction between job creation costs and an agency problem. The agency problem triggers separations during economic downturns even though both the employer and the worker would be better off if the job was not discontinued, that is, affected jobs have strictly positive surplus values. Similarly, booms make it possible for more jobs to overcome the agency problem. These effects do not offset each other, because business cycles reduce the expected job duration for these jobs. With positive job creation costs, business cycles then reduce the creation of valuable jobs and lower average activity levels. Considering a wide range of parameter values, we find estimates for the cost of business cycles ranging from 2.03% to 12.7% of gross domestic product.

Item Type: Article
Official URL:
Additional Information: © 2014 The Authors
Divisions: Economics
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Sets: Departments > Economics
Collections > Economists Online
Date Deposited: 09 Sep 2014 11:11
Last Modified: 20 Feb 2021 05:18
Funders: Dutch Science Foundation (NWO)

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